As part of my monitoring process, I review the list of dividend increases every week. I believe that this exercise provides a quick snapshot of the guidelines I have set up for my investing, and how I implement them with real world information.
In general I look for the following in evaluating companies ( my entry criteria).
1) A minimum of ten years of annual dividend increases
2) A P/E ratio below 20
3) A dividend payout ratio below 60%
4) Annual dividend growth that exceeds inflation
5) Analyzing the trends in earnings per share growth over the past decade
6) I do not have minimum yield requirements any more
Over the past week, the following companies raised dividends. The companies include:
Automatic Data Processing, Inc. (ADP), together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization Services. The company raised its quarterly dividend by 10.50% to 63 cents/share. This marked the 43rd consecutive year of annual dividend increases for this dividend champion. The company has managed to grow annual dividends at a rate of 12.60%/year over the past decade. Between 2008 and 2017, the company grew earnings per share from $2.19 to $3.85. ADP is expected to earn $3.92/share in 2018. Currently, the stock is selling for 28.30 times forward earnings and yields 2.20%. I believe that the stock is very overvalued, and not a good idea today. I would find it worth a second look on dips below $78/share. This is equivalent to 20 times forward earnings.
Emerson Electric Co. (EMR) designs and manufactures products, and delivers services to industrial, commercial, and consumer markets worldwide. The company raised its quarterly dividend by 1.10% to 48.50 cents/share. This marked the 61st consecutive year of annual dividend increases for this dividend king. The company has managed to grow annual dividends at a rate of 7.40%/year over the past decade. Between 2007 and 2016, the company grew earnings per share from $2.65 to $2.45. Emerson Electric is expected to earn $2.61/share in 2017. Currently, the stock is selling for 23.60 times forward earnings and yields 3.10%. I view the shares as overvalued today. Given the lack of earnings growth, I would give the company a pass. I believe that the streak of consecutive annual dividend increases is at risk, given the high dividend payout ratio at 79% and the lack of earnings growth.
Universal Corporation (UVV) engages in leaf tobacco business worldwide. It is involved in procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. The company raised its quarterly dividend by 1.90% to 55 cents/share. This marked the 47th consecutive year of annual dividend increases for this dividend champion. The company has managed to grow annual dividends at a rate of 2.10%/year over the past decade. Between 2008 and 2017, the company grew earnings per share from $3.82 to $3.97. The latter number included a one-time charge from conversion of preferred stock into common stock, which reduced retained earnings. It is purely an accounting charge that did not impact net income, which is why I adjusted the numbers for 2017 for it to represent the earnings power of the company as close as possible. Currently, the stock is selling for 14.30 times earnings and yields 4%. The valuation is low and appears attractive at first glance. The dividend is stable and has a safe dividend payout ratio. However, the lack of earnings growth, and the decline in revenues over the past decade, do not bode well for future dividend growth.
National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg that provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments. The company raised its semi-annual dividend by 8.90% to 61 cents/share. This marked the 18th consecutive year of annual dividend increases for this dividend achiever. The company has managed to grow annual dividends at a rate of 4.70%/year over the past decade. Between 2007 and 2016, the company grew earnings per share from $1.82 to $2.15. National Bankshares is expected to earn $2.14/share in 2017. Currently, the stock is selling for 20.40 times earnings and yields 2.80%. The stock is a little pricey right now, and I am also concerned that earnings per share have been trending down for the past five years.
Starbucks Corporation (SBUX), together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. The company raised its quarterly dividend by 20% to 30 cents/share. This marked the 8th consecutive year of annual dividend increases for this dividend contender. The company has managed to grow annual dividends at a rate of 24.90%/year over the past five years. Currently, the stock is selling for 24.60 times forward earnings and yields 2.10%. Between 2007 and 2016, the company grew earnings per share from $0.43 to $1.90. Starbucks is expected to earn $2.32/share in 2017. I would be interested in Starbucks on dips below $46/share. This is equivalent to 20 times forward earnings.
Snap-on Incorporated (SNA) manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide. The company operates in Commercial & Industrial Group, Snap-on Tools Group, Repair Systems & Information Group, and Financial Services segments. The company raised its quarterly dividend by 15.50% to 82 cents/share. This marked the 8th consecutive year of annual dividend increases for this dividend contender. The company has managed to grow annual dividends at a rate of 8.90 %/year over the past decade. Between 2007 and 2016, the company grew earnings per share from $3.09 to $9.20. The company is expected to earn $2.32/share in 2017. Currently, the stock is selling for 16.90 times earnings and yields 2.10%. Despite the lack of long dividend streak, Snap-on appears very appealing for future research based on earnings growth and valuation.
Atmos Energy Corporation (ATO), together with its subsidiaries, engages in the distribution, transmission, and storage of natural gas in the United States. It operates in three segments: Regulated Distribution, Regulated Pipeline, and Nonregulated. The company raised its quarterly dividend by 7.80% to 48.50 cents/share. This marked the 34th consecutive year of annual dividend increases for this dividend champion. The company has managed to grow annual dividends at a rate of 3.10%/year over the past decade. Atmos has managed to grow its earnings per share from $1.92 in 2007 to $3.38 in 2016. The company is expected to earn $3.83/share in 2017. Currently, the stock is selling for 23.30 times forward earnings and yields 2.20%. I think that the stock is overvalued today, but may be worth a look to analyze the company if it sells for 20 times earnings.
Thank you for reading!
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